Salix Pulls Off Surprise Win

A key FDA recommendation caught investors off-guard.

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It was supposed to be a bloodbath -- shareholders fled, but Salix Pharmaceuticals (SLXP) seemingly pulled off the impossible.

The specialty pharmaceutical company's shares have been on a roller coaster ride over the last week after the NASDAQ halted trading on the stock when it dropped almost 15% as it awaited a key opinion from the FDA (stocks are often halted when a company is expecting a decision that can significantly affect share price). But Salix's Travelers' Diarrhea drug Xifaxan got a positive recommendation from the panel for use in the treatment of hepatic encephalopathy, a disease usually caused by liver failure that allows toxins to build up in the brain.

The committee recommended Xifaxan 550 mg tablets in a vote of 14 to 4, noting that the drug seemed to have benefits for patients. The decision was based on a 299-subject, double-blind, placebo-controlled, late-stage study done by the company. The panel also reviewed a long-term open-label study as well as evidence derived from other hepatic encephalopathy studies.

The FDA will make a final decision about the approval of the drug by March 24, but the agency usually follows its advisory committee's opinion. Salix has orphan drug status on Xifaxan for the indication and would have seven years of marketing exclusivity on the drug should it be approved.

"We are very pleased with the advisory committee's support for the approval of Xifaxan 550 mg tablets. If approved, Xifaxan 550 mg will be the first new option for the management of hepatic encephalopathy in over 30 years," said Bill Forbes, Chief Development Officer at Salix. "We believe the availability of Xifaxan 550 mg has the potential to change the treatment paradigm for hepatic encephalopathy."

Despite Xifaxan already being on the market in a lower dose for the treatment of Travelers' Diarrhea, the panel's decision came as a surprise to shareholders and analysts. The Gastrointestinal Advisory Committee of the FDA released documents on Friday in preparation of the hearing that expressed concerns over safety and efficacy. Analysts were convinced that there was going to be a delay on the approval of the drug as well as concerns over safety risks that would require more testing. Questions were being thrown around by both the panel documents and the analysts as to whether the studies done by Salix adequately proved that the drug was safe and effective. It was noted that the studies weren't on a large scale, weren't done on the sickest patients, and didn't last long enough.

"It was a shocker when the briefing documents were less than pristine. It was even more of a surprise when the first half of the meeting was negative," said Jefferies analyst Corey Davis, who has a "Buy" rating on the stock. "Rational thought prevailed at the end of the day when they realized that this is not a well-treated disease. I felt Salix did a good job of allaying any safety concerns. Hospital data saved them on the efficacy front -- the 50% reduction in hospitalization was very compelling evidence of efficacy."

Shares of Salix jumped more than 21% midday Wednesday to linger near a trading price of $29 per share. The shares have been trading in the range of $6.14 to $29.91 over the last 52 weeks.

Xifaxan has been the major growth driver for the company since its ulcerative colitis treatment Colazal faced generic competition in December 2007. Xifaxan brought in $93 million in revenues for the first nine months of 2009. The company estimates that the hepatic encephalopathy market represents a commercial opportunity of $600 million in the US.

"I didn't see anything that came out of that panel that would require the FDA to ask for more studies," added Davis. "Everything was pretty thoroughly vetted yesterday."

Salix is also investigating Xifaxan for the treatment of Irritable Bowel Syndrome. The full results of the late-stage studies will likely be presented in May. Davis says that the approval of Xifaxan for IBS would be an even bigger moneymaker for the company.

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